Stocks moved higher on better-than-expected economic data after selling off the week prior after a strong Payroll Report. As we regularly state, this is a marathon and not a sprint so after forty-plus years in this business we seldom get too excited over moves in either direction. That said, absent a policy mistake from either the Trump Administration or the Fed, we think the downside is limited as earnings growth remains adequate to support rich valuations. However, we also believe a substantial move to the upside is improbable until we get clarification of President Trump’s economic policies.
· The bond market rallied this past week on better-than-expected readings on inflation (see CPI below) as the yield on the 10-Year U.S. Treasury note which was headed toward a market-concerning 5.00% fell to 4.61% at the close of business on Friday. That yield had gotten up to 4.80% earlier in the week. Let’s not get too excited as all were just fretting over the rise in rates because of the robust jobs report released one week ago Friday. To quote Mark Twain, “the rumors of my demise are greatly exaggerated.” Perhaps we can apply that same line to inflation. In our opinion, inflation will hang around the 2.5% mark, a bit above the Fed’s target, but most likely palatable for now as the Fed readies for the Trump Administration.
· Flip the script. Thus far in 2025 the sectors that lagged last year, namely Energy, Materials and Industrials have been at the top this year. Although it is certainly much too soon to determine if this is simply a case of buying the losers and hoping for a short-term bounce as opposed to the beginning of something meaningful, it does bear watching.
· Financials rallied as earnings from JP Morgan Chase (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and Goldman Sachs (GS) all came in above expectations. We think the rally in this group has legs as the yield curve continues to normalize as well as steepen.
· Shares of Apple (AAPL) declined modestly this past week on disappointing iPhone data in China and concerns that their Artificial Intelligence (AI) offering leaves a little to be desired. Despite the drop, we believe that shares will be supported by the services component of the company as well as the anticipation of the release of the iPhone 17 due out later this year.
· Mortgage Rates according to the Federal Home Loan Mortgage Corporation (FreddieMac), “mortgage rates ticked up for the fifth consecutive week and crossed seven percent for the first time since May of 2024. The underlying strength of the economy is continuing to this increase in rates. Despite rising rates, Freddie Mac research highlights that consumers can save money if they shop for several different lender quotes.” (Sources, Federal Home Loan Mortgage Corporation, National Association of Realtors)
"It’s The Economy…”
· Housing Starts surged 15.8% or by 205,000 to a seasonally adjusted annualized rate (SAAR) of 1,499,000 during December as compared to 1,294,000 in November. This marks their highest level since February 2024. During December, Single-family housing starts rose 3.3% or 34,000 to 1,050,000 from 1,060,000 (-2.6% y/y). Meanwhile Multifamily housing starts exploded 61.5% to 449,000 in December (-8.4% y/y) from 278,000 during November. (Source, U.S. Census Bureau)
· Retail Sales rose 0.4% higher during December (3.9% y/y), after rising 0.8% in November. Spending on Motor Vehicles & Parts rose 0.7% during December (8.4% y/y) as Retail Sales Excluding Motor Vehicles & Parts rose 0.4% (2.9% y/y). A key reflection of the health of the consumer, Restaurant and Drinking Place Sales fell 0.3% during December (2.4% y/y) after rising 0.1% in November. (Source, U.S. Census Bureau)
· Retail Inflation as measured by the Consumer Price Index (CPI) rose 0.4% during December (2.9% y/y), after rising 0.3% during November and 0.2% over each of the four months prior to that. The CPI has fallen from a y/y high of 9.1% during June 2022 but edged up from 2.7% y/y one month ago. Energy prices rose 2.6%, which accounted for 40% of the rise in the CPI. On a more positive note, the cost of shelter which comprises one-third of the CPI rose 0.3% resulting in a 4.6% y/y, the smallest y/y increase since January 2022. Excluding food and energy, the core CPI rose 0.2%, below expectations, which somewhat eased the fears that inflation was reaccelerating. (Source, U.S. Bureau of Labor Statistics)
· Prices at the wholesale level as measured by the Producer Price Index rose 0.2% during December after edging up 0.4% during November. Over the past year the PPI has risen 3.3%, up from 3.0% y/y last month, but down from a peak rate of 11.7% during March 2023. Energy prices rose 3.5% during December (-2.0% y/y) after remaining unchanged during November. Excluding food and energy, the core PPI head steady during December (3.5% y/y), after rising 0.2% in November. (Source, U.S. Bureau of Labor Statistics)
Upcoming Economic Reports scheduled to be released this week include the following: on Wednesday, the December Index of Leading Economic Indicators (LEI); on Thursday, the Weekly Report of Initial Claims for Unemployment Benefits; and, on Friday, December Existing Home Sales and the final reading of January Consumer Sentiment from the University of Michigan.
We are in the heart of earnings season. Companies Scheduled to Report Earnings Include – 3M (MMM), Capital One (COF), DR Horton (DHI), Netflix (NFLX), United Airlines (UAL), GE Vernova (GEV), Johnson & Johnson (JNJ), Procter & Gamble (PG), American Express (AXP), Nextera Energy (NEE) and Verizon (VZ).
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Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”